The opinion
T.C. Summary Opinion 2007-207
UNITED STATES TAX COURT
RICHARD AND ARLINE MULLER, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 21941-05S. Filed December 10, 2007.
Richard Muller and Arline Muller, pro sese.
Kristina L. Rico, for respondent.
CARLUZZO, Special Trial Judge: This case was heard
pursuant to the provisions of section 7463.1 Pursuant to section
7463(b), the decision to be entered is not reviewable by any
other court, and this opinion shall not be treated as precedent
for any other case.
1
Unless otherwise indicated, section references are to the
Internal Revenue Code of 1986, as amended, in effect for the
relevant period.
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Respondent determined a $12,567 deficiency in petitioners’
2003 Federal income tax and a $2,513 accuracy-related penalty
under section 6662(a). The issues for decision are:
(1) Whether a distribution from an individual retirement account
(IRA) is includable in petitioners’ 2003 income; and (2) whether
petitioners are liable for the accuracy-related penalty.
Background
Some of the facts have been stipulated and are so found.
Petitioners are and were at all times relevant married to each
other. Their joint 2003 Federal income tax return was timely
filed. References to petitioner are to Richard Muller.
Petitioner, who was born in 1934, spent most of his working
career in the trucking industry. One of his former employers
went out of business during 2000. As a result, petitioner
received a $72,000 distribution from some type of employment-
based employee benefit plan. No portion of the $72,000
distribution was included in the income reported on petitioners’
2000 joint Federal income tax return. As best can be determined
from the record, at least a portion of the $72,000 distribution
made its way into an individual retirement account that
petitioner maintained with Commerce Bank.
The total value of the IRA as of January 1, 2003, was
$47,860.49. Three interest accruals totaling $595.62 added to
the balance of the IRA during 2003; otherwise there were no
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deposits or additions to the IRA. Pursuant to a request made by
petitioner on December 17, 2003, the IRA was closed and, taking
into account an interest penalty, petitioner received a
$48,366.65 distribution from the IRA on that date (the IRA
distribution). The IRA distribution is evidenced by a Form 1099-
R, Distributions From Pensions, Annuities, Retirement or Profit-
Sharing Plans, IRAs, Insurance Contracts, etc., issued to
petitioner by Commerce Bank.
Petitioner deposited $40,000 of the IRA distribution into a
regular time deposit account. The disposition of the remaining
portion of the IRA distribution ($8,366.65) is not known, and
petitioners now agree that at least that amount should have been
included in the income reported on their 2003 return.2
The income reported on petitioners’ timely filed 2003
Federal income tax return, which was prepared by a paid income
tax return preparer, does not include any portion of the IRA
distribution, but it does include a different distribution, in a
much smaller amount, also evidenced by a Form 1099-R.
In the notice of deficiency, respondent increased
petitioners’ income by the amount of the IRA distribution.
Respondent also imposed a section 6662(a) accuracy-related
2
Petitioner mistakenly believed that he used a portion of
the IRA distribution to pay an outstanding Federal income tax
liability from 2000. The record clearly demonstrates that the
payment he recalled was made in 2002, the year before the IRA
distribution.
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penalty upon the ground that the underpayment of tax required to
be shown on petitioners’ 2003 return is a substantial
understatement of income tax.
Discussion
It is clear, and the parties agree, that the IRA
distribution was made from an account described in section
408(a). They further agree that the IRA distribution is subject
to tax as provided in section 72. See sec. 408(d)(1). Section
72(a) requires that the IRA distribution be included in
petitioner’s income to the extent it exceeds petitioner’s
“investment in the contract”. See secs. 72(b)(1), (c),
408(d)(2).
Following trial, the Court held the record open so that any
question regarding petitioner’s investment in the contract in the
IRA account could be resolved. As it turns out, petitioner’s
investment in the contract, within the meaning of the relevant
statutes, was zero as of the close of 2003.
At trial petitioners took the position that $40,000 of the
IRA distribution was excludable from their 2003 income because
that amount was “rolled over” into a different qualifying
account. They are mistaken on the point. Although petitioner
used $40,000 of the IRA distribution to open a time deposit
account, the transaction was not a “rollover contribution” as
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defined in section 408(d)(3) because the time deposit account
to which the funds were deposited is not the type of account
described in that section.
Because petitioner had no investment in the contract in the
IRA, and no portion of the IRA distribution is excludable as a
rollover contribution, respondent’s determination that the entire
amount of the IRA distribution is includable in petitioners’ 2003
income is sustained.
In the notice of deficiency respondent imposed a section
6662(a) accuracy-related penalty. The $12,567 deficiency placed
in dispute in this case results entirely from petitioners’
failure to include the IRA distribution in the income reported on
their 2003 return. As relevant here and for purposes of the
imposition of the penalty, the underpayment of tax and the
understatement of income tax are computed in the same manner as,
and equal to, the deficiency. Cf. secs. 6211, 6662(d)(2),
6664(a).
According to respondent, the penalty is applicable because
the underpayment of tax is a substantial understatement of income
tax. See sec. 6662(b)(2), (d). Because the understatement of
income tax exceeds $5,000, it is a substantial understatement of
income tax within the meaning of section 6662(b)(2). See sec.
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6662(d)(1)(A)(ii).3 Respondent’s burden of production with
respect to this penalty has been satisfied. See sec. 7491(c).
The section 6662(a) accuracy-related penalty does not apply
to any portion of the underpayment if the taxpayer demonstrates
that there was reasonable cause for such portion and the taxpayer
acted in good faith with respect to it (the good faith
exception). Sec. 6664(c)(1); sec. 1.6664-4(a), Income Tax Regs.
A taxpayer who reasonably relies upon the advice of a
competent tax professional can avoid the imposition of the
section 6662(a) penalty, if the taxpayer demonstrates that the
tax professional was supplied with sufficient information to
accurately prepare the taxpayer’s Federal income tax return. See
United States v. Boyle, 469 U.S. 241 (1985); Schwalbach v.
Commissioner, 111 T.C. 215 (1998).
Reliance on a tax adviser is not reasonable, however, where
the taxpayer has failed to disclose adequately “all necessary
information” affecting the computation of the taxpayer’s tax
liability. Ellwest Stereo Theatres of Memphis, Inc. v.
Commissioner, T.C. Memo. 1995-610.
Petitioners do not claim, and the record does not otherwise
indicate, that petitioners provided their return preparer with
3
Ten percent of the tax required to be shown on
petitioners’ 2003 return is less than $5,000. See sec.
6662(d)(1)(A)(i).
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information relating to the IRA distribution. Petitioners have
failed to establish that the good faith exception applies to the
imposition of the section 6662(a) accuracy-related penalty. See
Higbee v. Commissioner, 116 T.C. 438 (2001). Respondent’s
imposition of that penalty is sustained.
To reflect the foregoing,
Decision will be entered
for respondent.